Question

We make GPS units. Our predetermined OH rate for 2008 is $28 / DLH, calculated from the following budgeted 2008 data: Variable MOH = $180,000 per year, Fixed MOH = $380,000 per year, DLH's 20,000. We are considering a special order for 200 GPS units at $122 each. The normal selling price of our GPS units is $149. The unit product costs are: Direct Materials: $67.00 $32.00 Direct Labor: MOH applied: $42.00 If the special order were accepted, there would be no effect on normal sales of this or any other product. Also, we have enough excess capacity to make these units. You should make our standard assumptions about DM, DL, VOH and FOH. You should also assume that Variable MOH is really driven by direct labor hours. What would be the effect on the company's profit of accepting this special order? O A. An increase of $1,900. OB. A decrease of $1,900. C. An increase of $22.500. D. None of the above.

Answer 1

when the special order does not affect the present regular sales and company have excess capacity to produce the units of special order, the relevant costs are variable costs.[ material + labor + variable overhead]

fixed cost here is constant and will not be affected by the special order.

we will calculate variable overhead per hours and hours required for one unit.

variable overhead = total variable MOH/ Direct labor hour

=$180,000/20,000

=$9 per hour

hour required per unit = manufacturing overhead required per unit /predetermined OH rate

=$42/28

=1.5 hour per unit

variable overhead per unit = $9 per hour*1.5hours

=$13.5

special order incremental cost and revenue

Incremental revenue	$24,400	[$122*200GPS units]
Incremental costs
Direct material	$13,400	[$67*200units]
Labor	$6,400	[$32*200 units]
Variable manufacturing overhead	$2,700	[$13.5*200units]
Increase(decrease) in net income	$1,900	[24,400-13,400-6,400-2,700]

There will be increase in net income by $1,900